Copper, commodities sell-off may signal slowdown
By Nick Godl, MarketWatch
Last Update: 3:58 PM ET Jan 4, 2007
NEW YORK (MarketWatch) -- A sell-off in commodities -- from copper to crude oil -- over the past few sessions is telling some veteran market watchers that a slowdown in economic growth, likely one of considerable magnitude, is already underway.
In the last two days alone, commodity prices seem to have fallen off a cliff.
Copper futures, which tumbled 7.7% on Wednesday, fell another 1.8% on Thursday -- and have dropped 27% from their December highs.
Crude-oil prices fell nearly 5%, following a 4% drop in the previous session. The front-month futures contract was trading at its lowest level since June 2005.
In fact, everything from grains to base metals to livestock to cotton has been selling off over the past few sessions, notes Dennis Gartman, editor of the Gartman Letter investment newsletter.
"In all, it was an unseemly start to the year [for commodities]," he wrote Thursday.
The Dow Jones AIG Commodity Index ( 26099104
, ) was last down 3.2% at a 3-month low.
But why would this signal an economic slowdown?
'Copper is the metal with a Ph. D. in economics.'
— Barry Ritholtz, Ritholtz Research & Analytics
Most commodities are used in the production of industrial goods. When producers start demanding fewer raw materials, it becomes noticeable in commodities prices much earlier than in official economic statistics, explained Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.
Copper, in particular, is often used as a reliable economic indicator because of its widespread use in production.
"Copper is the metal with a Ph. D. in economics," Ritholtz said. "It's used in the wiring of homes and offices, in plumbing in construction, and it's also a key component in electronic goods.
"When it softens, it means we're making fewer homes, offices and computers."
A fast-falling housing market and cutbacks in automobile production took a toll on the economy in 2006. Growth as measured by gross domestic product slowed from 5.6% in the first quarter, when it was boosted by a post-Hurricane Katrina recovery, to 2.6% in the second quarter and to a yet to be finalized but estimated 2% in the third quarter.
The manufacturing sector contracted in November and barely grew in December, while retail sales over the holidays have investors wondering whether consumers are starting to feel pinched.
Similarly, the big drop in oil prices in recent months is raising concerns. Besides being used in the production of plastics found in many finished goods, oil is also used for the transport of goods across the globe, Ritholtz pointed out.
Many market strategists look to transportation indexes, such as the American Trucking Association's Truck Tonnage Index, as additional indicators of U.S. economic health. That index plunged 3.6% in November after a 1.9% drop in October, and it's at its lowest level since 2003, the ATA reported.
"November 2006 marked the single worst month for for-hire truck tonnage since the last recession," said ATA Chief Economist Bob Costello. "Both the month-to-month and year-over-year decreases indicate that the economic slowdown is in full gear.
Yet, few investors have picked up on most of these signals.
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Copper sell-off = recession.
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Posted - 01/04/2007 : 20:20:06
